Profits and the Reasons for Shutting Down a Business.

Profits and the Shutdown Decision

Shut down decisions induced by economic development is usually reached after analysis of the Net Present Value of the firm and contingencies that are likely to face the business in the long run. Technically, shut down decisions are arrived at when the average variable costs are more than the marginal revenue, therefore, the company would be reflecting losses in the statement of comprehensive income.

First and foremost, legal fees such as increased land and property taxes will be a major reason for shutdown of the motel. The probability of increased tax costs is a crucial reason for the shutdown. The more the value of land increases, the more the government increases tax, therefore, creating a situation where the marginal revenue is below the average cost.

Secondly, perfect competition can bring down the motel. Progressive economic development will create competition as more advanced resorts would be set up in order to absorb the increasing market in the area. In a situation of perfect competition, the players in the market have knowledge about the micro and macro factors that affect the business.

Another issue is the lack of access to sophisticated technology, as well as, infrastructure to complement the economic development in the area will causes the closedown. The optimal decision in such a case would be mergers, acquisitions or reorganization.

Some of the costs to be incurred in the process of shutdown of the motel are the advertising costs for sale of the property. Secondly, legal costs will be incurred because a legal practitioner will be needed in the shutdown process. Other expenses include expenses such as accrued terminal benefits to staff, returns to shareholders and tax costs that are due to the government.

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